It is not easy to refuse government funding, especially during an economic crisis. This is exactly what two venture capital-backed technology startups from the Pacific Northwest recently did with their PPP (Paycheck Protection Program) loans.
The decision not to accept money in the midst of a global pandemic reflects greater confusion about the $ 660 billion program to support US small businesses and the types of businesses that should receive loans.
Incandescent CEO Dan Shapiro According to its 3D printing startup in Seattle, the PPP application was approved and $ 1.85 million was available. But the company, which raised $ 10 million from investors two years ago, ultimately refused to accept it. Shapiro said it was "difficult to move away from what is basically free of charge from the government."
"We were looking for ways to help, from 3D printing PPE to on-site protection to prevent the disease from spreading," said the CEO. "When we realized we could avoid layoffs and survive the crisis, we knew that the way to help was to step aside so that someone else could use this money instead of us."
Marketing startup based in Portland Lytics followed a similar path. The 80-person company, which raised $ 35 million in February 2019, was also approved for around $ 2 million, but declined.
"It wasn't about feeling bad," said Lytics president Jascha Kaykas-Wolff. “When we look at the needs of small and medium-sized businesses and look at access to capital in different places, we are in a different group. Because of this, and because of the intent of this particular loan, it was easy for us to make the decision we made. "
In other words, your favorite bar on the street won't have easy access to venture capital firms or other funding sources if your bank account reaches zero.
This ethical dilemma has caused many money-losing startups – especially those backed by well-known venture capital firms – to wonder whether it is right to take out government loans. For example, Outreach's co-founder, Manny Medina, whose company raised $ 238 million in Seattle, has decided not to apply for the PPP despite everything told the New York Times The past month has been "real pressure" from his bank and board to do so.
Kaykas-Wolff complained about the government's flow of communication about what types of companies should apply for the PPP.
"If we knew what we know now, we probably would never have applied," he said.
The PPP is designed to “provide small businesses with a direct incentive to keep their employees on the payroll,” says the Small Business Administration. The loans are for qualified small businesses with 500 or fewer employees who keep their workforce or use the money to hire redundant workers. Companies can request up to 250% of their monthly payroll.
But after the first round of credit approvals – which went quickly – many giant companies received PPP checks, while other small restaurants and local mom and pop shops remained empty-handed.
Now more than 40 listed companies will return their PPP loans. The hill reportedafter finance minister Steven Mnuchin threatened legal action. Other listed companies – such as Bsquare, RealNetworks and MicroVision from the Seattle region – have stuck to the PPP fund. In Bsquare Profit announcement MondayThe company, which increased quarterly sales and moderately increased cash on hand, said it secured PPP funds, "as part of a series of contingency planning efforts and to ensure that it remains adequately staffed to fulfill its role as a key supplier. "
VC-based media launch Axios returned his $ 4.8 million loan at the end of last monthciting "a public backlash against a variety of companies that have adopted the PPP, including us". Others give back loans under “vague guidance”. Bloomberg reported.
Aside from ethics, it is difficult for any business to refuse money, as most have difficulty getting revenue during the shutdown. More than 400 tech startups have cut back 45,000 jobs since March.
"I don't know of any startups who are rightly not worried about the impact of the pandemic on their business, their business model, the loss of some key employees, their customer base or their ability to raise capital next time," said Lewis Horowitz, chairman of Lane Powell's tax team. "Very few are so cashless that they feel they have enough capital to give up (or return) the PPP."
According to Shapiro, Glowforge is experiencing sales momentum as customers use the company's 3D printers at home to place orders. Glowforge is still hiring.
Kaykas-Wolff said Lytics had enough cash and customers to weather the COVID-19 storm. "We have confidence in the way we go," he said.
A new WTIA survey of startup executives from the Seattle region found that 39% of startups received PPP loans, while "very few" rejected their applications. "Some have returned the PPP due to the remaining uncertainty regarding the repayment terms," said the WTIA.
New SBA guidelines from April 23 forced VC-supported startups to "recalibrate their attitudes". protocol reported.
There are questions about which tech startups qualify for a loan. Business leaders have criticized an ambiguous application process due to complex SBA membership rules related to their investors. A company can be considered an affiliate of a larger company, such as an investment firm, that could disqualify a PPP application.
The WTIA survey also found that less than a quarter of startups are required by investors to provide additional capital when needed.
The Wall Street Journal reported last week that the SBA had failed to follow some congressional mandates with the PPP rollout, according to an agency inspector general.
Prosecutor last week accused the first company to be involved in a suspected PPP scam.
Congress added another $ 310 billion to the PPP last month after the initial $ 349 billion went fast. There are $ 123 billion left in the second round.
publisher's Note:: GeekWire applied for and received a PPP loan. More here.